1- Suppose the inflation rate is expected to be 2% this coming year, 1% the next year, 4% the year after that, and 5% thereafter. Assume that the real rate of interest will remain at 2%. The maturity risk premium on Treasury securities will be determined from the formula: 0.1(t - 1)%, where t is the securitys maturity. Make a hand drawn graph of the Treasury yield curve (on graph paper). Also draw the yield curve for Southwest Airlines on the graph. The yield curve for Southwest Airlines will be below the Treasury yield curve.

2- Suppose the inflation rate is expected to be 2% this coming year, 1% the next year, 4% the year after that, and 5% thereafter. Assume that the real rate of interest will remain at 2%. The maturity risk premium on Treasury securities will be determined from the formula: 0.1(t - 1)%, where t is the securitys maturity. The yield curve for KKA Air, a start up regional airline, will be above the Treasury yield curve. (True, False)

3- What is the gain one receives from owning an asset?

4- Interest rates are typically

A) higher during a recession and lower during a strong economy

B) lower during a recession and higher during a strong economy

C) not influenced by the economy

D) determined solely by the Federal Reserve and not influenced by any other factors